Acquisition Puts CheckFree's SMA Platform in Question

The acquisition of CheckFree Corp. of Norcross, Ga., by Fiserv of Brookfield, Wis., announced on Aug. 2, has raised questions as to whether CheckFree's investment services division will stay or go, perhaps being independently sold off to the highest bidder. The unit provides the separately managed account (SMA) technology, including client reporting and portfolio management, for investment managers and broker/dealers.

A potential future sale could undermine CheckFree's current leadership position in providing its CheckFree APL technology to the SMA marketplace. By some industry estimates, CheckFree provides 85% of the technology that powers the SMA industry and has helped fuel industry growth.

"CheckFree's investment business is a good, solidly growing piece of CheckFree's business and a market leader," said David Koning, an analyst with Robert W. Baird of Milwaukee. "But this service is not why Fiserv bought CheckFree. I don't know if Fiserv will see it as a core business in the future. It will only be a small part of Fiserv's revenues going forward."

"We're not sure that there are many economies of scope and scale for Fiserv's retaining [CheckFree's] investment services business," wrote Glenn Greene, an equity analyst with CIBC World Markets in New York, in an Aug. 3 research report. "We think this business is an attractive acquisition target in its own right and could be sold to a pure-play managed account provider at a nice multiple."

The all-cash $4.4 billion acquisition will combine Fiserv's information technology management systems and transaction processing for more than 18,000 clients worldwide, including the 100 top U.S. banks as well as 6,000 smaller banks, credit unions and thrifts, with CheckFree's electronic commerce and online bill payment services for 21 of the top 25 financial services companies that collectively process one billion transactions annually. CheckFree's SMA capabilities, upon which 2.7 million accounts now rely, will also be transitioned over. That's an increase of 42% from the 1.9 million accounts that CheckFree announced it was servicing in September 2005.

There are numerous benefits to the acquisition. The firms offer complementary services within the financial industry, and will allow each company to cross-sell its core services to the other's clients. The merger will also provide scale and growth advantages, and allow for capital to be used to expand both the size and scale of systems. Fiserv anticipates eventually realizing $100 million in annual cost savings.

But post-merger, will CheckFree's separate account technology become just a small blip on Fiserv's radar screen? Neither officials from Fiserv or CheckFree had returned calls seeking comments on speculation.

In a conference call announcing the merger, Pete Kight, CheckFree's chairman and CEO said that the firm is seeing good growth in all three of its business. "We think managed accounts will win significant market share over mutual funds," he said, adding that "back-end [processing] silos will not work anymore."

Kight further noted that while the SMA tech business has grown well, making "CheckFree the dominant provider in this area by a wide margin," the firm is also progressing nicely in the first stage of development of its next generation, "transformational" platform that will enhance the entire back-end processing for managed accounts. That upgraded platform, known as CheckFree EPL (short for enhanced portfolio lifecycle) is expected to greatly enhance the technology, workflow and services currently available through the CheckFree APL platform.

"It's a very profitable business, and the best way to merge the business is to let it grow," said Jamie Waller, former top executive with Security APL, which CheckFree acquired in 1996. Waller is currently the chief operating officer for Fugent, the Dublin, Ohio-based provider of online collaboration products to the financial service industry. "I think it's a great acquisition and they will do well. Fiserv is a well-managed company and knows how important it is to service all of its relationships."

"I think it's the unknown, but most people I've talked to say that it's too soon to tell [the outcome]," said Gary Jones, vp of industry operations at the Money Management Institute.

"There's a lot of uncertainty as to what may happen," agreed Murtuza Vasowalla, vp of product marketing at Vestmark of Wakefield, Mass., a competitor of CheckFree within the technology space. CheckFree's SMA technology is a very small percentage of Fiserv's total revenue. "As a CheckFree customer, you have to wonder what level of investment Fiserv will continue to make in this business," he added.

"Over time, we will have opportunities," said Bevin Crodian, CEO of competitor Market Street Advisors of Edison, N.J. "We don't have to call away all of CheckFree's business to be successful."

It may be CheckFree's SMA technology itself that forces Fiserv's hand, skeptics said. The firm's building of its EPL platform has taken longer than expected and has cost millions of dollars, one critic said. Even if CheckFree is successful at building an operational EPL platform, transitioning clients to the system may prove difficult.